Public Bill Committee

[Mr Peter Bone in the Chair]

(Except clauses 1, 4, 8, 189 and 209, schedules 1, 23 and 33 and certain new clauses and new schedules)

Peter Bone: It might be helpful to the Committee if I make a few announcements at the beginning of our sitting. For the benefit of the shadow Minister, I should make it clear that no tea or coffee is allowed in the Committee Room. That is not my rule, but unfortunately the rule of the House. If they wish, hon. Members may remove their jackets. It would be most helpful if mobile phones were switched to silent.
One of the benefits of being a member of the Committee, if any hon. Member has not been a member before, is that each hon. Member receives either a red or a green box. I still have my red box. They will be stacked up in the room afterwards with names on them, so that members of the Committee can put their papers in them and leave them here and do not have to cart them around.
I want to explain a bit about the procedure of the Public Bill Committee: we shall first consider the programme motion for half an hour. We shall then deal with a procedural motion on written evidence, after which we shall begin the line-by-line scrutiny of the Bill. We shall be dealing with the clauses that have not been debated in the Chamber so we will start not with clause 1 but with clause 2. It might be useful for hon. Members to know that, quite often, we have grouped amendments and stand part debates together so they will be able to talk to the amendment as well as to the whole clause and, thus, matters will be speeded up a bit. As we are considering the Bill in Committee, hon. Members can speak more than once and will not be restricted to one speech. I call the Minister to move the programme motion agreed by the Programming Sub-Committee.

David Gauke: I beg to move,
That—
(1) the Committee shall (in addition to its first meeting at 10.30 am on Tuesday 24 April) meet—
(a) at 4.30 pm on Tuesday 24 April;
(b) at 9.00 am and 1.00 pm on Thursday 26 April;
(c) at 10.30 am and 4.30 pm on Tuesday 22 May;
(d) at 9.00 am and 1.00 pm on Thursday 24 May;
(e) at 10.30 am and 4.30 pm on Tuesday 12 June;
(f) at 9.00 am and 1.00 pm on Thursday 14 June;
(g) at 10.30 am and 4.30 pm on Tuesday 19 June;
(h) at 9.00 am and 1.00 pm on Thursday 21 June;
(i) at 10.30 am and 4.30 pm on Tuesday 26 June;
(2) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clauses 2 and 3; Clauses 5 to 7; Clauses 9 to 19; Schedule 2; Clause 20; Schedule 3; Clause 21; Schedule 4; Clauses 22 to 31; Schedule 5; Clauses 32 to 36; Clause 215; Clauses 37 and 38; Schedule 6; Clause 39; Schedule 7; Clause 40; Schedule 8; Clauses 41 and 42; Schedule 9; Clause 43; Schedule 10; Clause 44; Schedule 11; Clauses 45 to 47; Schedule 12; Clause 48; Schedule 13; Clause 49; Schedule 14; Clauses 50 and 51; Schedule 15; Clauses 52 to 146; Schedule 16; Clause 147; Schedule 17; Clauses 148 to 176; Schedule 18; Clause 177; Schedule 19; Clauses 178 to 180; Schedule 20; Clauses 181 to 183; Schedule 21; Clause 184; Schedule 22; Clauses 185 to 188; Clause 190; Schedule 24; Clauses 191 to 193; Schedule 25; Clauses 194 and 195; Schedule 26; Clauses 196 to 201; Schedule 27; Clause 202; Schedule 28; Clauses 203 to 205; Schedules 29 to 31; Clauses 206 and 207; Schedule 32; Clause 208; Clauses 210 to 212; Schedule 34; Clauses 213 and 214; Clause 216; Schedule 35; Clauses 217 and 218; Schedule 36; Clauses 219 to 221; Schedule 37; Clauses 222 to 225; Schedule 38; Clauses 226 and 227; new Clauses other than those first appearing on the Order Paper not later than Tuesday 17 April and relating to value added tax; new Schedules other than those first appearing on the Order Paper not later than Tuesday 17 April and relating to value added tax; remaining proceedings on the Bill;
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 9.00 pm on Tuesday 26 June.
It is a pleasure to serve under your chairmanship, Mr Bone, in the Committee stage of the Finance Bill. I wish to take the opportunity to say a few words before we commence our debate proper. I want first to welcome you as co-Chairman of the Committee as well as Mr Hood who will be assisting us during later stages of our proceedings. Both you and Mr Hood have made valuable contributions to previous Finance Bill discussions in different capacities. I had the great pleasure to serve with you, Mr Bone, on this Committee during the previous Parliament, and I look forward to your assistance. I do not know whether we will also have the benefit of Mrs Bone’s wisdom in the course of the next few weeks. I very much hope that we will. I, for one, am supportive of the view that spouses should make contributions to Finance Bill Committee debates.
In addition, I extend my welcome to the Clerks and the Hansard Reporters who will be assisting us greatly during the weeks ahead. It is also a great pleasure that we shall experience the enthusiastic participation of Opposition Members. I am delighted that three shadow Ministers will take part in our discussions on the Bill; it is an increase from last year.

Owen Smith: Inflation.

David Gauke: We can put it down to inflation. I am sure that it is not a decline in productivity, but I look forward to the contributions of the three shadow Ministers. Many hon. Members here have already contributed to debates in previous Finance Bill Committees, but I warmly welcome newer members of the Committee, such as the hon. Member for Feltham and Heston (Seema Malhotra) and the hon. Member for Inverclyde (Mr McKenzie). I welcome my hon. Friends on the Government Benches. I look forward to their contributions— on occasion.
The Finance Bill sets out wide-ranging reforms to reward work and support growth, as well as the Government’s next stages in supporting business while ensuring a fairer, more efficient and simpler tax system. I am sure that my hon. Friends will agree that part of that process is to make worthwhile and thoughtful contributions to Committees. I know that many hon. Members will do exactly that, and I look forward to the fascinating and constructive contributions of my hon. Friends.
As I said in my opening remarks in last year’s Public Bill Committee—this remains the case—the Bill is the product of consultation. More than 75% of the measures in this year’s Bill were announced in Budget 2011. More than 400 pages of draft legislation were published last December for technical consultation. The Government received more than 450 responses to the draft legislation—more than double the number of the previous year. The Government have also met interested parties throughout the year so that we could consider their views. I thank the bodies and individuals who have spent time to consider the draft legislation and contribute to the Treasury’s and Revenue and Customs’ work in preparing the Bill. All those contributions have made a better Bill.
Before I finish my remarks, I would like to say a few words about the Budget. I am sure that the hon. Member for Leeds West will briefly touch on her views on the Budget, and I hope that each time she does so, she will remember the 2 million people whom the Government are taking out of income tax; the tax cut for 24 million people; the additional taxes on wealthy individuals, which are expected to raise five times the cut in the additional rate; the cuts in corporation tax; and the new opportunities for businesses. If there is one thing that the Budget and Finance Bill are not, it is trivial. They are concrete steps to improve our economy and create a fairer tax system.
I look forward to some energetic and impassioned debate over the weeks ahead and, as I said, to serving under your chairmanship, Mr Bone.

Rachel Reeves: I, too, look forward to serving under your chairmanship, Mr Bone, and the chairmanship of Mr Hood. I also welcome the Clerk and his team to our discussions and thank them for their support so far and the support that I am sure all members of the Committee will receive in the weeks ahead.
I welcome to the Committee my hon. Friends the Members for Pontypridd and for Kilmarnock and Loudoun, who will support the Opposition through the Committee stage. I also welcome hon. Members from all parties of the House, including Members who are serving on a Finance Bill Committee for the first time—including myself—and those who are serving on a Public Bill Committee for the first time. I look forward to hearing the contributions of all hon. Members in the weeks ahead.
We have a long Finance Bill before us—I think the longest in history. I am not sure what that says about the productivity of Ministers or the people drafting the Bill. If there is one thing that the Bill is not, it is short. I look forward to scrutinising it line by line.
Opposition Members are particularly concerned about the lack of measures in the Bill and the Budget to support investment and enterprise and help our stalled economy recover. We are also concerned about the lack of support for hard-pressed families. The Minister mentioned the personal allowance, but we know that, while giving with one hand, the Government are taking much more with the other, particularly with measures on working tax credits and the freezing of benefits, which will take a huge amount of support away from struggling families and pensioners. There is also a lack of support for young people, who are struggling to get back to work right now. We will scrutinise those parts of the Bill, as well as those parts on charities and the encouragement—or lack of encouragement—of philanthropy in this country.
I look forward to the weeks ahead and to serving under your chairmanship, Mr Bone. I am not sure whether we will get support from your spouse, but my spouse has not given me much support in the financial aspects of the Bill—I am sure that the Minister will be pleased to know that. I look forward to the weeks ahead.

Robert Syms: I wholly agree with what the Minister said at the beginning of the sitting. I use this opportunity of my first speech to put on the record my entry in the Register of Members’ Financial Interests. I am a shareholder in a family business that rents out commercial property in Wiltshire. The debate is always wide-ranging, and half way through the Committee, if one is not careful, one might think, “I might or might not have an interest.” I prefer to put it clearly on the record at the beginning of the Committee.

Peter Bone: I thank Mr Syms for addressing that remark to the Programming Sub-Committee decision.

Question put and agreed to.

Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Mr Gauke.)

Peter Bone: Copies of memorandums that the Committee receives will be made available in the Committee Room. We now begin our line-by-line consideration of the Bill.

Clause 2  - Basic rate limit for 2012-13

Owen Smith: I beg to move amendment 8, in clause2, page2,line27,at end add—
‘(3) The Chancellor of the Exchequer shall review the impact of the setting of the basic rate limit on increasing the number of higher rate income tax payers and place a copy of the review in the Library of the House of Commons.’.

Peter Bone: With this it will be convenient to discuss the following:
Amendment 9, in clause2,page2,line27,at end add—
‘(3) The Chancellor of the Exchequer shall review the impact that setting the basic rate limit will have on average tax rates paid by total income and a copy of the report shall be placed in the House of Commons Library.’.
Clause stand part.

Owen Smith: May I warmly welcome you, Mr Bone, and the Clerks, and express my pleasure in serving for the first time under your chairmanship? I state on the record that my spouse has had absolutely nothing to do with preparing my notes. When I told her that I would be looking after tax, she said, “Gosh, complicated and boring, dear! Carry on.” I shall endeavour, however, not to make the very long line-by-line consideration of the Bill too boring for Committee members.
I will speak first about clause 2, which sets the basic rate limit for 2012-13 at £34,370; the previous limit was £35,000. It also provides that section 21 of the Income Tax Act 2007, on the indexation of allowances,
“so far as relating to the basic rate limit, does not apply for that tax year.”
We will test the Committee’s opinion on amendment 8 later this morning. Amendment 9 is largely a probing amendment, which is designed to test the Government’s desire to be, as they state, as transparent as they can on taxation matters. We will also discuss the entire clause to decide whether it should stand part of the Bill.
First, I shall discuss amendment 8. In setting the basic rate limit at £34,370 for 2012-13, the clause reduces the limit by £630 from the £35,000 limit that applied in 2011-12. Crucially, the rate is reduced by £2,630 from the amount at which it would have been set had it risen in line with indexation based on the retail prices index. Experienced Committee members will know that usually the basic rate limit rises in line with indexation, and the Government have to amend the law to change that rate. It would therefore have gone up by £2,630. The relevance of the change will become apparent in remarks I shall make later.
The reason for the reduction is clear—the Government have been open about it: it is intended to offset the impact of the £630 increase in personal allowance that clause 3 introduces. It is equally clear that the rationale for that change is to keep the higher rate threshold, which hon. Members will know is made up of the sum total of the basic rate limit and the personal allowance, unchanged at £42,475. I want people to hold that figure in their minds, because most of my remarks will relate to the impact of the basic rate threshold on that of the higher rate. The Government’s intention is clear. They have made it plain that they want to ensure that higher rate taxpayers benefit from the increase in personal allowance by the same volume, in cash terms, as basic rate taxpayers.
As was stated in the overview of taxation for the Budget 2010, the second reason for making that change and for netting off the £630 was to ensure that no additional higher rate taxpayers were created. That was in last year’s overview of the Budget. The problem with that is that it is not, strictly speaking, accurate that no higher rate taxpayers are created by netting off the £630 and maintaining the higher rate threshold at £42,475. The reason why it is not accurate is that, as you, Mr Bone and, no doubt, Mrs Bone would be able to tell us, freezing the rate does not necessarily freeze wages or inflation in any way, shape or form, and it does not stop incomes rising.
However slowly incomes are rising in this country, they are still rising. That rise and its impact is magnified and compounded by the rate being held steady. It is what the experts, among whom I do not count myself, call fiscal drag, which this Government, when in opposition, used to be very concerned about. Before I came into this House, I recall Members such as you, Mr Bone, commenting on the damaging and deleterious effects of fiscal drag pulling taxpayers from one band into the next. In fact, the then shadow Chancellor—he is now the Chancellor—was so concerned about it throughout that period that I found no fewer than 27 references by him, which were not terribly flattering, to the impact of fiscal drag. He used to talk fondly about it as one of the stealth taxes imposed by the former Chancellor and former Prime Minister, my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown). There is a quote from the Chancellor that sums up his view. In 2005, he said:
“Fiscal drag is a sly and stealthy way of extracting more tax from earners while avoiding headline increases in tax rates. Since 1997, Labour has raised the marginal rate of tax for millions of middle-income families. Gordon Brown’s deviousness means that hard-working public servants are now forced to pay top rate tax.”
Hon. Members will remember that I referred earlier to the fact that normally the basic rate is indexed to RPI-pegged inflation. I just quoted the Chancellor complaining about the period when Labour was in power, but we have the record of how often the former Chancellor, my right hon. Friend the Member for Kirkcaldy and Cowdenbeath, tried to ensure that we mitigated the effect of fiscal drag. In 2003-04, indexation went up in line with inflation. In 2004-05, the basic rate was up 3%, in line with inflation. In 2005-06, it was up 3.2%, in line with inflation. In 2006-07, it was up 2.8%, in line with inflation. In 2007-08, it was up 3.9%, in line with inflation. One low spot, which we must concede, is that in 2008-09 it went down 0.6% below inflation, but we rectified that in the following year, 2009-10, when it went up 7.5% above inflation. The former Labour Government’s record of trying to keep track with inflation and tackle fiscal drag stands up to scrutiny, despite the Chancellor’s negativity about its impact.
Since this Government have come into power, in 2010-11, which was the first chance that they had to do something about it, it was flat at 0.0% and RPI was negative. In 2011-12, it was down 6.4%, which was well below inflation. In 2012-13, it is pegged to be down 1.8%, which is well below inflation and, in 2013-14, it will be down a further 6.2%, which is below inflation.
The record of the previous Government, in trying to ensure that taxation rates keep in line with inflation and that as few people as possible are sucked into higher rates of tax by fiscal drag stands up to fair scrutiny, as compared with the record to date of the current Government and as compared with the projections of undershoot with inflation over the current period.

Grahame Morris: I am sorry to interrupt the flow of my hon. Friend as he sets out an excellent argument. He quoted the Chancellor, but the director of the Institute for Fiscal Studies, Paul Johnson, said:
“This is part of a long-term trend towards the encroachment of 40% income tax on to people earning above-average but relatively modest salaries.”
It might be tradesmen, plumbers or electricians in that category, and that is a major concern that was not highlighted during the Budget debate on the Floor of the House.

Owen Smith: I am grateful to my hon. Friend for that intervention. He is right that it is a long-term trend, as Paul Johnson has pointed out, which is why the previous Government sought to mitigate the effects of what is called “bracket creep” and sought to ensure that the basic rate kept pace with inflation. At the time, the shadow Chancellor castigated our record on this issue, but I have demonstrated that our record stands up to scrutiny.

Jacob Rees-Mogg: Will the hon. Gentleman give way?

Owen Smith: I will be delighted to be addressed by the hon. Gentleman, as I normally am, de haut en bas.

Jacob Rees-Mogg: I would not dream of addressing the hon. Gentleman in such a way. I want to point out that fiscal drag comes about because wages normally rise faster than prices. The hon. Gentleman has simply told us that the limits went up in line with prices, not with wages, so fiscal drag was undoubtedly happening under the previous Government.

Owen Smith: The hon. Gentleman was not listening to my remarks, which is unusual, because he is normally an assiduous listener in the House. I conceded a moment ago that fiscal drag undoubtedly took place. It always takes place under any Chancellor. There are periods when it is more pressing. It could be argued that it is more pressing right now, because prices are rising dramatically and wages have significantly stagnated. The impact has particularly increased since 2003-04. Those facts are undisputed.
However, the previous Government, as I have tried to demonstrate, recognised the impact of fiscal drag and tried to make sure, to the extent that we could, that the increases in the basic rate kept pace, and we tried to ensure that as few people as possible were dragged into it. As my hon. Friend the Member for Easington said, people were dragged into it, and there is an ongoing trend. I will question the Minister later, but we need a discussion about what we are all comfortable with, philosophically, in relation to the income brackets and jobs that cause people to fall into the higher rate of tax. 
There are philosophical questions about whether middle managers, nurses, train drivers or plumbers are the sorts of professions that we imagine, in any era, ought to be in the higher rate bracket, as they are going to be under the current Government.

Charlie Elphicke: Under the changes announced in the Budget, how much more—or less—does the hon. Gentleman think the higher rate taxpayers will pay in tax?

Owen Smith: Higher rate taxpayers will not pay any more in tax, because they will benefit to the same extent as lower rate taxpayers, as I explained earlier, through the netting off of the £630. That is clear, but it is not a sharp political point to make. My point is that lots of other people—332,000 according to Grant Thornton, the analysts that the Chancellor used to quote, when he was shadow Chancellor, to the former Prime Minister—are going to be pulled into the higher rate as a result of fiscal drag. Such people are not millionaires. They are not on big salaries. They are ordinary—frankly, in many respects, working-class—citizens of this country.

Julie Hilling: Does my hon. Friend agree that there is a difference between people getting a real increase in their wages, which may mean that they go into a higher rate of tax, and people not getting a real increase but simply keeping pace with inflation? If someone gets a real increase, they might expect to pay higher tax. If they do not get a real increase, they would not expect to be double-whammied, as it were, not only by inflation but by moving into a higher tax bracket.

Owen Smith: I believe the hon. Lady is right. My point is that these are not people who are going to be given a significant increase in their wages and who will, therefore, find themselves bouncing up a bracket; these are people for whom, simply by virtue of their wages keeping pace with inflation—this is what is going to happen to the 332,000 people who are on the cusp of the threshold—fiscal drag means that they will wake up one morning to find themselves not in the 20p bracket but in the 40p bracket.

Graeme Morrice: My hon. Friend’s substantive point when he refers to what the current Chancellor said in opposition—my hon. Friend mentioned that there have been 27 occasions on which the Chancellor has criticised the previous Labour Government’s record, although my hon. Friend has highlighted that in effect that record is very good—is that, despite the Chancellor’s critique of what he perceives to be fiscal drag caused by the previous Labour Government, in power he is doing very little about it.

Owen Smith: It is worse than that, because the Chancellor is doing something about it. Only in 2012-13 will the threshold be frozen at £42,475; in subsequent years the Government will cut the threshold. Next year, and the year after that, the threshold gets cut. In 2013-14, the Government propose to cut the threshold for the 40p rate by £2,125. Only half of that amount will be offset by the £1,100 increase in the personal allowance, which is not like this year, when there is net-net offset. Next year, half of the cut will be offset by the increase, and the Government have been clear about that. The Government’s rationale for that is to ensure that in subsequent years higher rate taxpayers benefit to the tune of only a quarter, versus the full amount this year, as a result of the subsequent increases in the personal allowance.

John Mann: It would be helpful to the Committee if my hon. Friend could outline the kinds of people and professions we are talking about. One can get bogged down in the statistics and not see real people. I am sure the measure will not affect people such as skilled train drivers, car workers at places such as Toyota and Nissan or highly skilled plumbers and electricians. Surely those are not the kinds of people who the Government are hitting, because I am sure Government Members would be fearful of attacking such people.

Owen Smith: I hate to disappoint my hon. Friend, but I fear I must because, of course, those are precisely the people who are going to struggle as a result of the measure.

John Mann: That cannot be true.

Owen Smith: I hate to disabuse my hon. Friend, but it is true.
Currently, the largest employer in my constituency of Pontypridd is General Electric, which has an engine servicing plant. There are more than 1,000 terrific jobs, with men earning between £30,000 and £50,000. The average wage is some £42,000. These are skilled engineers who have worked their way up, by and large, from apprentices on less than £15,000. The plant’s general manager worked his way up right through the wage brackets from being an apprentice at the plant. The average wage is precisely on the threshold. These are precisely the ordinary workers in constituencies such as mine who will be hit by the measure.
Of course, the measure will also affect teachers, managers on local health boards, managers of local service companies and nurses in certain parts of the country. These are ordinary working people who will suddenly find themselves in the top rate of tax. I thought the Government were about cutting tax, and I thought they had a certain philosophy on tax that does not seem easily reconcilable with such activity.

Iain McKenzie: Does my hon. Friend agree that the Government need to provide year-on-year details of the numbers affected by this fiscal drag, if we are to scrutinise them and accurately assess how many have been drawn into that tax bracket?

Owen Smith: I agree with my hon. Friend. That is why we have tabled amendment 8, which says:
“The Chancellor of the Exchequer shall review the impact of the setting of the basic rate limit on increasing the number of higher rate income tax payers and place a copy of the review in the Library of the House of Commons.”
Amendment 9 says:
“The Chancellor of the Exchequer shall review the impact that setting the basic rate limit will have on average tax rates paid by total income and a copy of the report shall be placed in the House of Commons Library.”
I confess that my researcher colleague did say there was a slight danger that the Government would say that we are tabling a lot of amendments calling for a review. He had no doubt that at some point the Government would say, “If the Government conducted all these reviews, the Chancellor would not have time to do anything else.” My response, in light of the Budget, was, “That might be a jolly good thing, if he spent all of his time conducting reviews and not looking at the nation’s finances too closely.”

Grahame Morris: Will my hon. Friend give way?

Charlie Elphicke: Will the hon. Gentleman give way?

Owen Smith: I give way to the hon. Member for Dover

Charlie Elphicke: The hon. Gentleman is making an entertaining argument about fiscal drag, but it is long on sophistry. We all know this is a double-headed reform. The personal allowance is being increased and the threshold is being brought down. Let us take the example of his constituents at General Electric. According to the Red Book, most of them next year will be £42.50 better off. Surely they would welcome that; why doesn’t he?

Owen Smith: The Exchequer Secretary said at the beginning that he looked forward to the interventions by his hon. Friends, provided there were not too many. I suggest he does not want too many such as that. Far from my argument being full of sophistry, what I have just laid out are facts. That was not sophistry and not much rhetoric, just facts.
Equally, do we really think that those workers at General Electric are bouncing up and down, pleased at the £42 that they are getting back in their pockets as a result of the personal allowance change, when it will be offset, given that most of them are family men, by the £511 worse off they will be as a result of tax credit and other changes, which we will debate at length in clause 3? Are they going to be pleased by £42 offset by the £450 increase that they have already had to put up with as a result of indirect taxation, including VAT, over the past year? That is £1,000 minimum by which they are worse off, offset by a paltry £42. Of course, that is only this year. As I said a moment ago—more facts, not sophistry—next year it is cut, and those people will find themselves with a significant offset when the top rate has gone down to £41,450.
I have more facts for the hon. Member for Dover. The Government concede—not in last year’s but in this year’s overview of tax and legislation—that that will have an impact. That is not fiscal drag, since the Government still do not cough to fiscal drag in any of the documents, despite the fact that they used to think that it was terribly concerning. However, they do cough to the fact, on page A7 of this document, that an additional 300,000 people will next year be brought into the higher rate of tax as a result of the drop to £41,450 that I have just described.

Grahame Morris: The hon. Member for Dover made a key point about the impact on individuals of how much tax they pay. What is also key is the substantial number of people being dragged into the higher rate of tax. My hon. Friend the Member for Pontypridd quoted a study by Grant Thornton that identified 300,000 additional higher rate taxpayers. Does he have an estimate that he could place on the record of how many people will go into the higher rate tax bracket in the period up to 2014?

Owen Smith: As luck would have it, Mr Bone, I do, and I am more than happy to go into that with the Committee at some length. Of course, the figure of 300,000 in one year does not take account of fiscal drag; that was outlined in the Government’s own numbers. My hon. Friend mentioned Grant Thornton—the former Chancellor’s favourite analyst of this feature of endless Budgets—which said that as the number does not take fiscal drag into account, the amount of people who will find themselves in the higher band rate will be nearer 700,000 next year. That, of course, is in addition to the 300,000 impacted by the freeze this year, so a million people will be affected over two years.
At this juncture, Mr Bone, I want to ask the Exchequer Secretary a question or two. Will he confirm that fiscal drag means that it was not, strictly speaking, accurate of him, other Ministers, and Budget documentation to say that there will be no new higher rate taxpayers as a result of the Budget measures? Does he accept that freezing the rate will necessarily create higher rate taxpayers? Unless the higher rate rises in line with inflation and is index-linked, as has been legally provided for, there will be additional higher rate taxpayers.
Secondly, has there been any assessment of the impact of fiscal drag and the number of people who will move into the 40p rate? Although it is great that we have Grant Thornton’s assessment—I will come to further assessments by others—it is only an assessment from an outside body, and we would place far greater trust and faith in Government numbers. It would therefore be useful if the Government undertook an impact assessment on fiscal drag and the number of people who will move into the 40p rate. If they will not, why not? If they are not prepared to do that, even though the issue was such a bone of contention for them in opposition, questions must be asked about the reason for their lack of interest as soon as they have their bums on their ministerial seats, or in their ministerial cars. Perhaps they are no longer interested because they are too busy looking at other things, such as pasties, caravans and other important measures.
As my hon. Friend the Member for Easington said, the Institute for Fiscal Studies estimates that now that this trajectory has been set, by 2014, the number of higher rate taxpayers will hit 5 million for the first time, and will rise to 5.8 million, to be precise, by 2015. That is striking, because if we juxtapose that with the number of higher rate taxpayers in this country when the previous Labour Government left office, one finds almost a doubling of the number of people in the higher rate bracket. Some 3.1 million people were in the higher rate bracket when we left office. If the trajectory does not change, we assume that almost 6 million people— 5.8 million, to be precise—will be in that bracket by the time of the next election. That strikes me as an extraordinary thing for a Tory Government to do.
We live in a topsy-turvy political world these days, Mr Bone, as Mrs Bone will no doubt attest, but for a Tory Government to double the number of higher rate taxpayers in its first five years in office strikes me as counter-intuitive. I would not have bet my mortgage on that at the last election; it seems very odd indeed. What does the Exchequer Secretary think about it philosophically, as a Tory tax cutter—something I am sure he would proudly describe himself as in various forums outside the House? How does he feel about the fact that, on his watch, there will be twice as many higher rate taxpayers as there were when he came to office?
I wonder what he thinks about another comparison. The figure of 5.8 million would mean that 15% of all taxpayers were in the high or additional rate by 2015, compared with 3% in 1978-79. That, too, seems an extraordinary trajectory, and one which will have accelerated twofold over the past five years. Paul Johnson of the Institute for Fiscal Studies said that it is part of a long-term trend, but it is a trend that is accelerating exponentially under a Tory Government. That is an absolutely remarkable state of affairs.
Does the Minister take a view on that? Does he think that is legitimate? Does he think that people working in GE, or in schools, hospitals or service companies, will think it curious that a Tory Government should be moving them into a higher rate of tax? Far from feeling the benefit of the personal allowance this year—although that is offset by all the other measures that the Government have introduced—they will not feel it in subsequent years. Does he accept that given the immensity of the change that I have described, the issue ought to be kept under careful review by the Government? Will he start by accepting amendment 8, which would commit him to conducting precisely such a review?

Nigel Mills: The hon. Gentleman is making a powerful argument. For the record, would he like to confirm that between Labour taking power in 1997 and 2008, when the recession started, Labour doubled the number of higher rate taxpayers from about 2 million to about 4 million? It would be helpful if he could tell the Committee what Labour’s policy is. Would a Labour Government undo any of these changes to try to reduce the number of higher rate taxpayers? Would they not want to increase the personal allowance for the very lowest paid, so that they can increase the threshold for the higher rate? I am not clear what he wants to happen.

Owen Smith: Let me be absolutely clear—although, to be honest, I think I have been clear. I was clear, first of all, about the number. It was not 4 million, but 3.1 million people who were in the higher rate. That is the number that I am quoting from the IFS.

Nigel Mills: The difference is that the 4 million figure that I quoted for 2008 was before the recession, which took 1 million people back out of the higher rate tax band.

Owen Smith: First, that shows that there is some volatility around those numbers; I accept that. I would not necessarily accept that doubling was volatility, although bouncing around is. It is very clear: when we left office in 2010, there were 3.1 million higher rate taxpayers. That is a fact. When this Government leave office, hopefully in 2015, there will be almost 6 million higher rate taxpayers. The number has doubled in that period. Those are the facts. That is happening in a period of recession and wage stagnation, whereas the rise from 2 million to 3.1 million under Labour happened over a period—over 30 successive quarters—of economic growth. That is a radically different context and economic backdrop. The hon. Gentleman will no doubt concede that the effect is exponentially greater when we see that doubling in a period of economic stagnation—we hope that when we see the numbers tomorrow, it will have been stagnation, and not further recession.
The Minister could at the very least accept that it is worth keeping under review the impact of the changes, looking at the types of individuals who are shifting between brackets, and assessing the long-term impact on wages, the ability to purchase houses, and meeting the rising costs of every day foodstuffs and vital fuel. Those are my simple reasons for suggesting that we should keep this under review, and that the Minister should renew his interest in fiscal drag.

Mark Garnier: I am grateful to my—to the hon. Gentleman for giving way.

Owen Smith: You can call me hon. Friend.

Mark Garnier: Maybe one day, if the hon. Gentleman sees the light. He has referred on a couple of occasions to the Tory-led Government. On a point of pedantry, it is, of course, a coalition Government. He did not address the specific point made by my hon. Friend the Member for Amber Valley: what would a Labour Government do if they were in power? Does the hon. Gentleman advocate cutting the higher rate of tax?

Owen Smith: No. I did not say that we did. The only reason why I did not answer the hon. Member for Amber Valley is that I forgot. I will happily put on the record that Labour does not think that the increase in the personal allowance is bad; nor do we think that taking people out of tax is bad—far from it—but the Government have left serious questions on the table and, to mix my metaphors, bluntly, they have brushed under the carpet the ancillary effects of changing the basic rate and offsetting the increase in the personal allowance against it. I am raising legitimate questions about that, as it impacts not only on the facts, figures and statistics, but on the real lives of real people in all our constituencies.

Grahame Morris: That is an excellent point, and it is very important that it is placed on the record. Does my hon. Friend recognise that as a consequence of the Budget, the income tax saving will be £42,500 for someone earning £1 million a year and £17,500 for someone earning £500,000? There is no doubt about who is benefiting from the Budget. [ Interruption. ]

Owen Smith: I do not know what was said from a sedentary position, but I thought that my hon. Friend made a very powerful point, which I think we will return to time and again in Committee. Hopefully we will not be ruled out of order, Mr Bone, because we have already discussed the 50p rate. That rate and the changes made to it are the backdrop to all the changes in the Bill. That, not the personal allowance changes, is the headline rate, and it most clearly reveals the warped priorities of the Tory-led Government. There is not much evidence of the impact of the Liberal Democrats in the Budget, unless they want to claim responsibility for putting a tax on caravans.

Peter Bone: Order. I am grateful to the shadow Minister for prompting me to intervene. As we have debated the subject on the Floor of the House, may we return to the clause, please?

Owen Smith: I am grateful to you, Mr Bone, for calling me to order. I merely comment that the 50p rate, though not the subject of the clause, is the backdrop to the Bill, and tells us everything that we need to know about this Tory Government. [Hon. Members: “Coalition.”] This Tory Government. [ Interruption. ] I did not catch the joke, but I was about to provide another cause for amusement. I was thinking about the Tory-led, or Liberal-Tory, coalition yesterday, and it intrigued me to see that the schedule of amendments that the Government Whip provided was in coalition colours—blue and light blue. Perhaps those are the new Liberal-Tory coalition colours. [Interruption.] It got a laugh from the Minister’s pal behind him, though not perhaps a big one.

Rachel Reeves: The Minister’s tie.

Owen Smith: Ah, a very small yellow stripe—up no one’s back, of course.
Amendment 9 says:
“The Chancellor of the Exchequer shall review the impact that setting the basic rate limit will have on average tax rates paid by total income and a copy of the report shall be placed in the House of Commons Library.’.”
I have said that we will test the will of the Committee on amendment 8, as it is on a very important issue. Amendment 9 is also important, but it tests the Government’s will to make good on their promise to be more transparent about tax rates and the impact of budgetary decisions and various rates of taxation.
Last Monday, the Government published a set of numbers, produced by HMRC, showing the average tax rates paid by those on incomes between £100,000 and more than £10 million. The Opposition welcome that. We thought that it was a thoroughly good thing for the Government to do to demonstrate their interest in transparency. I do not know whether they thought it through terribly carefully; I think the point of it was to try to show that there were 10 or 12 individuals in the country earning over x amount of pounds—several million—who were avoiding tax. What it seems to show me is that the vast majority of taxpayers in this country, in almost every bracket, from £250,000 through to £1 million, pay their taxes and do not avoid them. At least 73% of those who earn between £250,000 and £500,000 pay their taxes at above 40%. At least 81% of those who earn between £5 million and £10 million pay their taxes at above 40%. The average number is way over 75%.
We thought that we would test the Government’s desire to continue in that vein, and we tabled a simple amendment that asks them to consider whether they would do the same thing for groups whose income is between zero pounds—or £10,000, taking the stated aim for the personal allowance—and £100,000. That seems a simple way of doing it, and is in keeping with the Government’s trajectory on transparency. Our simple, probing amendment 9 asks the Government to demonstrate what the average rates of tax being paid right across the board are, so that we can keep track of that over a period.
The ancillary benefit is that we would get a greater idea, as the years went by, of how many people were moving from one bracket to another as a result of fiscal drag or cuts by the Chancellor to the basic rate limit. It would be a simple way to measure how many thousands of people—perhaps it would be 1 million, 2 million, or up to the 5.8 million by the end of the period; who can tell?—shifted into the higher rate bracket under this tax-raising Tory Government.

John Mann: It is a great pleasure to serve under your chairmanship, Mr Bone, and what a refreshing change it is—this is clearly the influence of the Backbench Business Committee—for a Committee Chair to explain how things work and what the strange red boxes are; I thought that they might be sandwich boxes brought in by the hon. Member for Poole. I am sure that the boxes that we have been provided with are British-made.
In the spirit of modernisation, I appreciate that a programme has been set, but I believe that it is always appropriate for Public Bill Committees to look beyond their narrow remit. Perhaps an informal away-day would be in order for the Committee to test the impact of the Budget. I am happy to help co-ordinate, because there are workplaces not too far from me where many people will suffer disbenefit as a result of the clause. Perhaps we could go to Toyota at Burnaston in Derbyshire, or to Bombardier. I appreciate that not all Members will be keen to be seen by, or to hear from, the work force in Bombardier, but they are precisely the people who will suffer a disbenefit from the Budget. To complete the day, I am more than happy to arrange a little impromptu lunch visit to Bakewell, where Members can taste the original Bakewell pudding while this quintessential English product, baked in traditional ways, is still 20% cheaper than it will be when the full impact of the Budget is felt in England.
I am delighted that the Opposition Front Benchers are testing the Committee with this amendment at an early stage. I cannot think of a more appropriate resolution than to test the issue. This is my first Finance Bill Committee; for some reason, when my party was in power, the Whips never gave me the honour of testing the robustness of Government policy, or eking out any potential weaknesses in the arguments so that those on the Treasury Bench could amend any mistakes and the people could be contented—that, in my view, is the role of Government Back Benchers on these Committees. What is the point of being a patsy who votes the way the Whips tell them to on every vote?
Clearly there is a dilemma if, in a vote on something fundamental to the Budget, a Government Back Bencher disagrees with the Government. I understand the cost of disloyalty, especially with boundary changes imminent, and I recognise the difficulties. We appreciate that Government Back Benchers are likely to test rigorously whether a particular proposal is robust enough to meet the challenge of public opinion, and then may perhaps melt into the background when it comes to a Division. This amendment, however, is the ideal amendment from which to judge the quality and character of Government Back Benchers, and whether they are prepared to use their little bit of independence and common sense. I am sure that, having heard me, the Government will immediately back down and agree to the amendment, and appropriately so, to save their Back Benchers from that dilemma. All the amendment would do is provide us Back Benchers and the country with more information. If the Government’s measures are right for the country, then of course providing such information would help the Government’s cause.

Robert Syms: I had the honour of sitting on one of the previous Government’s Finance Bill Committees towards the end of the last Parliament, and I cannot remember a single occasion in its nine, 10 or 12 sittings on which a Labour Member voted against the Labour Government. I wonder why the hon. Gentleman thinks we are going to vote against a very good Budget.

John Mann: As I tried to explain, I was not selected to be among those who could test the propositions. The Whips have a mindset that will eventually, if one does not listen to the country, lead to electoral defeat. Sadly, from the country’s point of view, that is what happened. It would have been in the previous Government’s interests to have had more independents on Finance Bill Committees putting the case. Amendments requiring more information that could be used to inform debate were not tabled during previous Finance Bill Committees. This is the first time that such a sensible amendment has been tabled.
With due deference to my hon. Friend the Member for Pontypridd, who is brilliantly articulate on behalf of his part of the country, I know that he does not claim ownership of the proposal; I know that he borrowed it from the hon. Member for Wyre Forest and me. It is our joint proposal, because, in essence, it comes from the Treasury Committee. The Treasury Committee, which the Chancellor quoted last week, brought forward the concept in the report it published last week—a report that was agreed by the two of us, and unanimously by the rest of the Treasury Committee. It is a great Committee that is thinking about the way forward for the economy and the country. The Treasury Committee said that this independent reporting was needed to inform debate and, critically, future decision making.

Owen Smith: I rise only to plead guilty as charged. I freely confess that the amendment is borrowed, as my hon. Friend said, from the wise words of the Treasury Committee, and I hope that will give the proposal extra strength and force, as with the rest of his arguments.

John Mann: And, of course, on the Treasury Committee it was the hon. Member for Wyre Forest who led this debate, backing the Chairman of the Committee, who is a Conservative. The hon. Member for Wyre Forest had not just passive but articulate support for the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), a leading Liberal Democrat advocate on all matters to do with finance, budgets and the economy. I was persuaded by their argument and their proposition. I was convinced, as were the other Labour members of the Committee, that we should go with them.
We voted with the coalition in this. We felt that we should be independent-minded and that, despite the proposal coming from the joint coalition Benches, we should do the honourable, decent and sensible thing, because it would inform us and those on our Front Bench. There is therefore, of course, an element of vested interest, because information brought into the public domain is important for us as legislators. I look at the hon. Member for North East Somerset and there is no possibility that he could not agree with a proposal like this to bring information into the public domain.
I see three Liberal Members. If one adds up the numbers at this moment in time, then perhaps Government Back Benchers are hurriedly being texted to turn up. I am absolutely convinced, however, that when the three Liberal Members look at this and what the hon. Member for Caithness, Sutherland and Easter Ross—their representative on the Treasury Committee—did with an identical proposal, identical politics and an identical end effect, they will feel obliged to vote for such a modest proposal, which would not affect the decision making of the Budget at all and would inform for the future. This proposal will give what you, Mr Bone, and I truly want to see: the Back Benchers truly thinking for themselves.

Peter Bone: Order. While I sit in this Chair, I have absolutely no views on anything.

John Mann: I appreciate your appropriate neutrality, Mr Bone. I will speak solely for myself.
I can perceive, looking into the eyes of the Liberal Democrats and looking at their prospects in the short and long term, that they want to demonstrate independence and a contribution and there can be no easier way. Can one imagine, on this proposal, which would not impact at all on the decision making of the Budget but would inform for the future, the Liberal Democrats cosying up to the Tories in refusing to inform themselves as hon. Members of the information of the decision made? I cannot conceive that any Liberal Democrat could possibly do so. I am sure that this speech was entirely unnecessary, in that the Minister will accede to this request, because it serves his interest and because he is convinced that his proposals will benefit from the sunlight of information. That is all this is. I suspect that a new spirit will emerge and that sensible, moderate Opposition proposals will be rallied to across the Committee and we can then move forward to greater matters.

Grahame Morris: It is a pleasure to serve under your chairmanship for the first time, Mr Bone. In support of my hon. Friend the Member for Pontypridd, I will discuss the consequential effects of the increase in the tax threshold that is proposed in the clause. I shall also highlight other issues that directly affect my constituents as a result of the changes.
My hon. Friend rightly identified that a million more basic rate taxpayers will move into the higher rate, 40%, tax band, because the starting point for the rate is set to fall from £42,275 in 2012-13 to £41,450 in 2013-14. As he told the Committee, the estimate suggests that as many as 5.8 million additional higher rate taxpayers will be created as a consequence of the measures in the Budget unless the Government take corrective action. I will be interested to hear how the Minister intends to address that matter.
Government Members have been vociferous in pointing out the benefits in the Red Book, which states that average earners will gain £220 a year from changes to personal allowances. However, we must also consider the recently completed Institute for Fiscal Studies study, which indicates that when the working families tax credit, other tax credits, fuel duties and so on are taken into account, average families will be, on average, £511 worse off—even without allowing for the consequences of the VAT increase. So although low to average earners may benefit by a few hundred pounds from the increased allowance, as the Red Book indicates, high earners are the real beneficiaries of the Budget. As we said, for someone earning £1 million a year, the income tax saving will be £42,500; for someone on £500,000, the income tax cut will be worth £17,500 a year.
In the lead-up to the Budget, it was widely trailed that the rise in personal allowance from £8,105 in 2012-13 to £9,205 in 2013-14 would take a million people out of tax altogether. Liberal Democrat Members were keen to stress that point. [Interruption.] Well, there is a consequential effect, which I shall come to if I am allowed to continue. We welcome the fact that a million people will be taken out of tax, but it is important to understand the consequential effects of changes elsewhere in the Budget. I am referring not to the pasty tax, the granny tax or any such controversial measures, but specifically to the changes to tax credits, which I shall discuss shortly.

Owen Smith: Does my hon. Friend agree that in all the Government comment from both coalition partners—the Liberal Democrats and the Tories—any recognition that the personal allowance benefit is more than offset by the other changes, to tax credits and so on, has been striking by its absence? It has been equally striking that all other independent commentators have made precisely that point—and the Government have failed to acknowledge it.

Grahame Morris: That is correct. I would be interested to hear the Minister’s comments in relation to the IFS study, which, as I said, indicates that average families with children will be £511 a year worse off. It is important to place that point on record. The Government argue that the best way to help families is to increase the amount of earnings that they can keep before tax. Philosophically we agree, but as I mentioned, we must consider the consequential effects of the Budget, especially for poorer working families who, for example, receive housing and council tax benefits. They would be only £33 a year better off as a result of the increase in the tax threshold. As we are aware—perhaps Opposition members of the Committee have greater contact with people in such situations—as people’s income goes up, their benefit goes down.

Seema Malhotra: It is a pleasure to be in Committee under your chairmanship, Mr Bone. I thank the hon. Gentleman for making excellent points, particularly around the impact that the changes could have on the income tax burden, the entitlement to benefits and family income planning. Does he agree that that is absolutely fundamental? Different family members may be choosing or planning to go out to work. There could be an impact on women’s income and the hours that they work. Families need to be able to plan ahead and have some certainty about their income.

Grahame Morris: I am grateful for that intervention. It is important to highlight the impact of the Budget, especially on women and working families.
If you will indulge me, Mr Bone, I want to mention Citizens Advice. It has claimed that while the Chancellor gives with one hand, the Secretary of State for Work and Pensions will be taking away with the other. This supports the point that I was making earlier with regard to the consequential effects of increasing thresholds and the impact that that has on the ability to claim benefits. Citizens Advice has produced figures and circulated them among members of the Committee. It suggests that poorer working families who receive housing benefit and council tax benefits will have £187 of their £220 annual gain clawed back. The chief executive, Gillian Guy, said:
“The poorest working families will feel the Government has turned its back on them—they needed this Budget to ease the pressure on their purse strings and make life easier. Instead they see high earners getting tax cuts.”
In many respects, raising the personal tax allowance is an empty gesture for many families struggling on low wages and who are in receipt of housing and council tax benefits. It is an acid test for such families. The weekly gain is less than the price of a loaf of bread. I do not propose to test Government Members on the price of a loaf of bread, but the weekly gain in some cases is a measly 63p. By my reckoning, that is about half the price of a loaf of bread.
We are told that the effect of the Budget may be fiscally neutral overall, but when we look at its impact on specific groups—my hon. Friend mentioned women—and when we look at earnings and people on very low incomes and the regional impact in regions like my own, it is anything but fiscally neutral.
The rise in personal allowances has to be taken in conjunction with—I know we are not dealing with it here, but it is relevant—the higher rate of VAT, which remains at 20% under this Government. It is a regressive form of taxation, which hurts those who have no choice but to spend their wages on life’s basic essentials. There are many pressures on incomes and living standards compounded by measures in other parts of the Budget. For example, the continuation of wage freezes throughout the public sector makes life much more difficult for ordinary people, as does the impact of inflation.
A very contentious point is the impact of increases in fuel duty, which has a major impact on domestic budgets. I am sure Government Members are acutely aware of it, if their postbag is anything like mine. Another consequence of the Budget is plans to localise public sector pay rates.

Peter Bone: Order. I think we are wandering away. Can we return to the amendment?

Grahame Morris: I am grateful to you, Mr Bone, for bringing me to order. I was simply seeking to illustrate my point with some examples of the effects the pressures on living standards will have on particular groupings and I will now turn back to the specifics of the clause and the amendment.
Families with children will lose an average of £511 in each of the following years due to changes to benefits and tax credits. In my constituency of Easington 1,400 families on modest incomes will lose all their child tax credit, which is worth around £545 per year; 350 working couples earning less than around £17,000 per year will lose all of their working tax credit, which is worth up to £3,870 per year, if they cannot increase their working hours. That point was made quite forcefully yesterday in questions to the Department for Work and Pensions by my hon. Friend the Member for East Kilbride, Strathaven and Lesmahagow (Mr McCann).
While any increase in general income tax personal allowance—the point when people first pay tax—is welcome, the Government are being disingenuous about the overall impact their policies will have on ordinary people in the north-east and constituencies like mine of Easington. Saga is based in my constituency. It has a direct mailing facility in Seaham. Dr Ros Altmann, the director general of Saga, said that older people were being hit by an “enormous stealth tax”. There is also an opportunity tax for pensioners. Dr Altmann said:
“Over the next five years, pensioners with an income of between £10,000 and £24,000 will be paying an extra £3 billion in tax while richer pensioners are left unaffected.”
The Budget is not fiscally neutral for one set of people. Those who will benefit are those at the top. The cut in the top rate of tax for those earning £150,000 a year is a Budget bonanza for the wealthiest in society.

Graeme Morrice: You can wait all day, Mr Bone, for one Grahame Morris to turn up. Then, all of a sudden, two of them turn up at the same time. It is a great pleasure to follow my hon. Friend the Member for Easington and it was a great pleasure to serve under your chairmanship, as I did last week when I took part in a debate on clause 1 in the House.
The two Opposition amendments ask for a review of the Government’s proposals. It is important that we look at the implications of those proposals and the impact they would have on our people. As my hon. Friend the Member for Easington mentioned a few moments ago, we should look at the impact overall and not just in the narrow context. I apologise if I drift into things that we will discuss shortly or things that we have already discussed, but we cannot discuss any of these things in isolation.
As my hon. Friend the Member for Pontypridd said, no one would disagree with the proposal to increase the personal allowance. We clearly welcome that. There is an impact on those going into the higher rate—a doubling since we were last in Administration. Of course, there is also an impact on child benefit, although the Government are making a bit of a U-turn on that as we speak.
The proposal is welcome, although we need to look at the overall impact.

Stephen Williams: Good morning, Mr Bone. It is still just about morning; time is moving very slowly today. If the hon. Gentleman welcomes the increase in the personal allowance—as I am pleased to hear from him and his colleagues—why does he think the current shadow Chancellor spent the entire general election rubbishing that Liberal Democrat policy and, in the coalition negotiations, said it was unworkable?

Graeme Morrice: I am grateful to the hon. Gentleman for his contribution. In the few moments that I have available, I do not want to rerun the general election campaign [ Interruption. ] . Well, I look forward to the general election campaign in three years’ time.

Owen Smith: I do not intend to rerun the general election either. However, I would point out—and my hon. Friend would no doubt agree—that the shadow Chancellor has pointed out on many occasions that the personal allowance is but one way to try to redistribute wealth to some of the most vulnerable people in society, the lowest earners. He has also pointed out, as Liberal Democrat Members often fail to do, that the most vulnerable—those in the lowest income deciles, often pensioners, earning less than the personal allowance—do not benefit from it at all. The overall impact of the measure affecting the personal allowance, which is of course relevant—

Peter Bone: Order. Not only is the intervention too long, it is completely irrelevant.

Graeme Morrice: Nevertheless, Mr Bone, I entirely agree with my hon. Friend. He is indeed correct to point out that there are myriad ways to help those in greatest need and most vulnerable in society. With regard to low pay, my right hon. Friend the Member for Kirkcaldy and Cowdenbeath, when Chancellor of the Exchequer under the previous Labour Government—[Hon. Members: “Where is he?”] I am sure he is around doing invaluable work for his constituents and adding great value to the parliamentary process.
I shall not be distracted. It was my right hon. Friend when Chancellor who introduced tax credits for low-paid people, which made a big difference. It was the previous Labour Government who took 8 million people out of poverty pay by introducing the national minimum wage, which was initially opposed by members of the then Opposition, although they now support it. I look forward to a time when we could introduce the living wage for our people.
To return to the amendments, as my hon. Friend the Member for Easington said, increasing the personal allowance is one thing. It may have some initial advantages for a number of people; unfortunately it is clearly offset by a range of disadvantages through previous proposals introduced by the current Government. Not least is the increase in VAT from 17.5% to 20%. That is clearly a regressive tax that has a major negative impact, particularly on those on low and middle incomes. An average family is losing something like £500 a year; a pensioner household is losing around £250 on average per year.

Ian Swales: I am not sure it is within the scope of the amendment, but the hon. Gentleman referred to VAT. Does he accept that those who spend the most pay the most VAT, so a cut in VAT benefits the wealthy the most?

Peter Bone: Order. Before the hon. Member for Livingston is tempted to start talking about VAT, that is absolutely out of order.

Graeme Morrice: Indeed. I am quite happy to move on from the regressive form of taxation, which is VAT and which impacts greatly on those with least income.
We have touched on the top rate of taxation, and to reduce the top rate of tax from 50% to 45% was an absolutely disgraceful decision of the coalition Government. [Interruption.] It raised next to nothing, and we have now confirmation officially through the Her Majesty’s Revenue and Customs official report and Government Ministers that the loss in one year is £1.1 billion. During the period of the spending review, it is up to £4 billion—money that could have been used either to reduce the deficit or to avoid what the Government believed a necessity in freezing the personal allowance for pensioners on low and middle incomes; 4.4 million grannies and granddads have lost out as a result of the 44,000 millionaires in the country benefiting by about £40,000 to £42,000 a year.
My hon. Friend the Member for Easington touched on pay earlier, and pay constraint is another aspect of the scenario. If we are looking at a review, we need to look at the whole thing in context. Many people in the public sector, for example, have had to suffer a pay freeze for the past couple of years and will have a further pay freeze for the current financial year. Yet, inflation is going up whatever measure we look at—the consumer prices index or the retail prices index. Lest I forget, any benefit and tax credit uprating has moved away from RPI to CPI so people are receiving less as a consequence.

Cathy Jamieson: Does my hon. Friend find it rather ironic, as I do, that some public sector workers who have had their pay frozen might find themselves, because of the actions of the Government, falling into the higher tax payment rate? Those people are teachers, social workers, care workers and others who have a valuable role to play.

Graeme Morrice: I am grateful to my hon. Friend for making that point. We touched on it earlier. My hon. Friend the Member for—John, what is your constituency?

John Mann: Bassetlaw.

Graeme Morrice: Bassetlaw. My hon. Friend was shocked at the prospect of people in certain lines of work ending up within the 40% tax rate.
I mentioned inflation earlier. Whereas several years ago under the Labour Government there was uproar from Conservative Members about high fuel prices, the average litre of petrol, certainly in my constituency, is £1.40 now, and that is having a major impact on other prices. Although the increase in personal allowance is to be welcomed, the offset overall due to increases in food prices, fuel prices, energy prices and inflation, and the freezing of various benefits or the uprating of various benefits in line with CPI as opposed to RPI and a whole range of other issues that I have mentioned means that people are worse off in real terms as a result of the proposals under the Bill. On that final point, I shall sit down.

Julie Hilling: It is a pleasure to serve under your chairmanship, Mr Bone, particularly on this day, the anniversary of the Kinder Scout mass-trespass. It is particularly pertinent that we are talking about the needs of ordinary people as opposed to the needs of millionaires. This Budget is about choice, and it is about the Government’s choice to make either cuts for millionaires or pain for lower and middle-income people. Now is the most relevant time to talk about the squeezed middle. At no time since the leader of the Labour party talked about—[ Interruption. ] Yes, indeed, our great leader.

Aidan Burley: Will the hon. Lady define, in terms of income, what the squeezed middle is? What are the lower and upper levels of income between which one is part of the squeezed middle?

Julie Hilling: That is an interesting intervention. My hon. Friends have talked at length today about who comes into the squeezed middle. It consists of teachers, firefighters, police officers and all the people who are doing ordinary jobs, who have managed to make some progress with their lives, but who are not affluent or can sit there and spend money willy-nilly. They are the people who are being affected by the list of things that I am just about to talk about.

Owen Smith: I take it that my hon. Friend will agree that wherever one sets the upper and lower bounds of the squeezed middle—I would happily do that on a different occasion, as I am sure I would be ruled out of order if I did it now—it is absolutely certain that, falling within whatever description of the squeezed middle one has, one would have the people who are paying the basic rate up to the threshold of £34,000, which we are talking about here, and one would absolutely include the people about whom we spoke earlier on, who earn between £42,000 and £44,000 and who are precisely the people who will be impacted by the upper rate. It is very simple; they are the squeezed middle.

Julie Hilling: I thank my hon. Friend for his intervention. Let me talk about who I consider to be the squeezed middle. They are the people who have, since the last general election, lost out on things such as child tax credit and the health in pregnancy grant and are now having to pay for school transport when they did not have to previously. They are the people who have been deeply affected by the increase in gas and electricity bills and fuel charges. They are the people who had made choices, had purchased their houses and were living to a certain standard of life, but are now no longer able to live to that same standard. They are very much the people who have been affected, who have always talked about the next generation doing better and having improvements in their life. Over the past two years, people have been going backwards in their aspirations and ability to live their lives as they had chosen to.

Ian Lavery: Are the people that my hon. Friends are talking about the people that the two “posh boys” promised to help most in the Budget?

Julie Hilling: Indeed. It is interesting, having spoken to hon. Members from across the House over the past couple of weeks, that there has been a real shock. The people whom the Government have said they want to support—those aspiring people—are the ones who are being squeezed hugely by actions taken in the Budget.
One wonders whether Government Members have any notion of what it is like to live on poor means or to be one of those people who have been aspiring and have been lucky enough to start earning £40,000 and having what one would suggest was a good standard of living but whose standard of living is being very much squeezed. Such people are also affected by other cuts, such as those to local government budgets or across education or health, and the fact that they have to pay more for school transport.

Seema Malhotra: I thank my hon. Friend for her comments, because the losers in the Budget are the young, the old, people on lower and middle incomes, and charities. An estimated 855 families in my constituency are set to lose their working tax credits, and nearly 18,000 families are set to be affected by child benefit changes. It is the 13th worst-affected constituency in the country. Does she agree that supporting the amendment is vital to provide the information and transparency that we need, which my hon. Friend the Member for Bassetlaw mentioned? Creating transparency about the impact of the change of the basic rate limit in increasing the number of higher rate taxpayers would let people decide for themselves whether the Budget is fair, and understand how they may be impacted now and in future.

Julie Hilling: My hon. Friend makes some excellent points. A great unfairness with the clause is that if people get a real increase in their salary, a promotion, or are properly moving up a tax band, they can understand why the change would happen to them, and we all accept that. However, the proposals will trap people into paying higher tax when there is no real increase in their salary and they are feeling a squeeze on their standard of living. Not only do they now have to pay more for so many other things, but they will be dragged into a higher rate of tax. Alongside that, they see people who earn substantially more than them, who are on over £150,000 a year, getting a tax cut. Where is the fairness in somebody earning just over £40,000 being squeezed on tax and having to pay more, when a person who earns four times as much—and there are people who earn considerably more than that—gets a tax cut? It is not fair, and it does not seem to make great economic sense.

Iain McKenzie: Does my hon. Friend agree that we have both ends of the spectrum here? In terms of people on the lower end of the tax scale, I know that the Government have committed to increasing the tax threshold over the course of this Parliament to £10,000. Many of my constituents, like those of my hon. Friend, would welcome that, but for one tiny point: they do not have a job to benefit from it with. Then we have the other end of the spectrum, involving people who we would not previously have considered to be in jobs that would fall into the higher tax bracket. We now find, however, that professions such as heavy goods vehicle mechanics in my constituency, who are working for my local bus operator, will move into the higher tax bracket. The proposals hit both ends of our constituents’ jobs market, and the beneficiaries are those moving into the millionaire bracket.

Julie Hilling: I absolutely agree. It feels desperately unfair, because such people will also be squeezed on child benefit changes, they were squeezed on the changes to tuition fees, and they are struggling because of VAT increases. People in the middle who are aspirational are now unable to maintain the standard of living that they had only a couple of years ago.

Charlie Elphicke: Looking at the amount of tax paid by basic rate taxpayers, and the heating and electricity bills that they have, does the hon. Lady not agree that Government policies to increase electricity bills by 15% and heating bills by more than 20% would be the wrong thing to do?

Julie Hilling: I am not sure that I understood the hon. Gentleman’s point. I do not know whether he wishes to intervene again.

Charlie Elphicke: In 2009, the right hon. Member for Doncaster North (Edward Miliband) set out a plan to increase heating and gas bills massively—15% for electricity and 23%-plus for heating. Does she not think that that adds to the burden of the costs of living?

Peter Bone: Order. Unless I am missing the point, I do not really see what that has to do with the amendment.

Julie Hilling: Thank you, Mr Bone. The hon. Gentleman is talking about private utility companies. I have no idea what he is referring to when he says that the previous Labour Government were going to increase the costs of the private utility firms. I do not understand his point at all. The reality is that those prices are zooming up and we argue that there should be Government intervention in those areas now to ensure that the utility companies do not make excessive profits. I think that I ought to leave that point and go back to talking about tax thresholds.
I will finish shortly. [Interruption.] That was very ungenerous. We are talking about the very people whom we want to be ambitious, who are innovators and wealth generators. The wealth in this country is frequently generated by small businesses. It is not necessarily the millionaires who are creating jobs, but those in the 40% tax bracket who are starting their own businesses and starting to employ people, and may, if they are very lucky, become those in the very highest tax bracket, but frequently that does not happen. They are those who are working day in, day out supporting the economy.
We want people to pay the tax that they owe, and the double irony is that those people who are just within the 40% tax rate are those who generally will pay their tax in full. They are not the people who will employ accountants and find all sorts of tax avoidance loopholes, so that they can pay something like only 10% tax on their incomes, as we know some millionaires do. They are those who are generally contributing to society, and are being squeezed. [Interruption.] I do not know whether the hon. Member for Chelsea and Fulham wants to intervene. I missed his point.

Greg Hands: Livingstone.

Julie Hilling: The hon. Gentleman names a person who has been accused of putting his tax elsewhere, but the Opposition have asked the Government to look into publishing the tax affairs of those on the Government side of the House. It does not seem that that information has been totally forthcoming, so we do not know how many use the devices of tax avoidance. We would welcome any move to close some of the loopholes, but the reality is that the people being squeezed are those who will in the main pay their tax in full, and those who undertake tax avoidance are paying 10% or 20%.
I hope that the Government will look at the amendment. It is totally unfair to have more and more people paying higher tax, when they do not benefit from a higher income. If someone benefits from a higher income, okay, they can take on more tax. My father was always pleased and proud to pay a higher rate of tax, because he was proud to be able to pay into the country, and my dad was not a socialist by any means. We seem to be being unfair to the squeezed middle. I hope that the Government will support the amendment.

Mark Garnier: It is a great pleasure to speak under your chairmanship, Mr Bone. I will be brief, because I think we would all like to make long-winded and pointless speeches a stranger to the Committee.
I shall respond to the hon. Member for Bassetlaw, my entertaining colleague on the Treasury Committee, who has spoken eloquently on some of its work, particularly the 30th report of the Session on the Budget. He spoke very well indeed on the Treasury Committee’s seeking of clarity and openness on the Budget.
I want briefly to draw attention to a couple of incredibly important points on clarity and openness. First, the new coalition Government have established the Office for Budget Responsibility, which makes the process of budget making much more open and subject to much more severe scrutiny. Secondly, paragraphs 7 and 8 of the 30th report—the Treasury Committee agreed unanimously on its recommendations—go to great lengths to congratulate the Government on the brevity of the Red Book, which has been reduced from 220 pages to 110 by cutting out the waffle and getting straight to the point. I will draw my words to an end there.

Owen Smith: On that point, before the hon. Gentleman concludes—

Mark Garnier: I think I will conclude, actually, because we want to move on.

David Gauke: It is a great pleasure to respond to the brief debate on clause 2 and the related amendments.
Clause 2 sets the basic rate limit for income tax for the 2012-13 tax year. The limit set this year means that the gains from the personal allowance increase for 2012-13 will be shared equally between basic and most higher rate taxpayers and that no higher rate taxpayers will be created by the policy.

Owen Smith: I assume that, having repeated the claim that the Budget does not create any higher rate taxpayers, the Minister will address the fiscal drag issue that I raised earlier and answer the specific question of whether in reality fiscal drag will create higher rate taxpayers.

David Gauke: The hon. Gentleman can rest assured that I will address all the relevant points raised by the Committee.
Clause 2 reduces the basic rate limit by £630 to £34,370 in 2012-13 which, when combined with the £630 increase in the personal allowance introduced by clause 3, means that the higher rate tax threshold for 2012-13 remains at £42,475. That means that the allowance increase will benefit all taxpayers with incomes below £115,970 by £48 a year on average in real terms, which is worth pointing out because someone listening to some of this morning’s speeches might fail to appreciate that a tax cut is being introduced for higher rate taxpayers in most circumstances. The national insurance upper earnings and profits limits remain aligned with the higher rate tax threshold.
The coalition Government are committed to creating a fairer tax system that rewards work, with real-terms progress every year towards increasing the personal allowance to £10,000. The £630 increase in the personal allowance introduced by clause 3 represents the next step towards £10,000 and will benefit 25 million individuals. The increase will remove more than 260,000 people from income tax altogether.
When we increased the personal allowance by £1,000 in 2011-12, we had to ensure that it was consistent with bringing the public finances back under control, so higher rate taxpayers did not benefit from that increase. We decided, however, that the benefits of this next increase should be shared equally with higher rate taxpayers, which supports growth by increasing the rewards of work for a wide range of individuals.
Budget 2012 announced that the basic rate limit in 2013-14 will be decreased to £32,245 and that the national insurance upper earnings and profits limits will be aligned with the higher rate threshold at £41,450. This means that higher-rate taxpayers will see a quarter of the gain of the 2013-14 personal allowance increase that basic rate taxpayers see. However, this will be legislated for in next year’s Finance Bill.

Grahame Morris: To aid my understanding, and as a point of clarification, does the Minister accept the estimate by the Institute for Fiscal Studies that, as a consequence of the changes to thresholds, 330,000 people will initially be in that higher tax band bracket, with 660,000 in the subsequent year? Does he accept those figures?

David Gauke: As far as the 2013-14 changes are concerned, we estimate that about 300,000 people will be in the higher-rate band, so our estimate is not very different from the IFS’s.

Owen Smith: I think the Minister has said, as a point of clarification in response to my hon. Friend the Member for Easington, that the Government anticipate that around 300,000 additional people will go into the higher rate of tax. Will the Minister confirm again that neither that number nor the earlier number—the flat number claimed earlier—take any notice of fiscal drag?

David Gauke: On the issue of fiscal drag, it is not easy to estimate exactly what increases individuals will receive in their salaries and wages over a period of time. Our estimate is based on a change in the higher rate threshold and the impact that that has and whether it brings people in or takes people out of the higher rate band, depending on their salaries in a particular year.
I need to raise two points with the hon. Member for Pontypridd. First, on the point made by some of my hon. Friends about the exact policy that he advocates, we are taking steps to raise the personal allowance. I am not sure whether he welcomed it, but he certainly did not oppose it. I think he said that it was one of a number of things that could be done. If we do not hold the higher rate threshold at a steady level, or at times reduce it, the benefit to higher rate taxpayers will be greater than it is for basic rate taxpayers. I do not know whether the hon. Gentleman is saying that that is what he would want to happen and that he thinks that that is the right thing to do, or whether he supports the approach that we have taken, which is to either focus the tax cuts and the benefits of the increase in the personal allowance on basic rate taxpayers, or, at most, ensure that higher rate taxpayers do not get a bigger benefit than basic rate taxpayers.

John Mann: Will the Minister give way?

David Gauke: Let me make this point, and then I will give way to the hon. Gentleman. We have choices and we have to decide what our priorities should be. We all know that we have difficult public finances with which we have to deal. We have high levels of borrowing. Where we can find scope for reducing income tax, there is a question as to where the priority should be.

Grahame Morris: Will the Minister give way?

David Gauke: Members are queuing up to intervene, but I shall finish my point before I give way. The Government have to decide what the priority will be. I find the logic of the Opposition’s argument this morning—to the extent that it is clear what their overall objective would be—somewhat strange. They seem to be saying that higher rate taxpayers should receive a bigger tax cut than basic rate taxpayers. I cannot believe that that is quite what they are saying and I suspect that that is not the position of the hon. Member for Bassetlaw.

John Mann: The Minister made an extraordinary statement. He said that it is extraordinarily difficult to estimate increases in wages and salaries over the next year. That is what he stated a moment ago. Is it not the case that all economic variables can be difficult to predict accurately, but with the Bank of England’s mandates on inflation, it is precisely estimating those variables that determines economic policy in this country? He cannot except wages and salaries by suggesting that they are a different variable from any other. Why is he seeking to do so?

David Gauke: In order to assess how many people fall above or below the higher rate threshold, we have to look at particular sectors. That means not looking at salaries and wages as a whole but assessing changes for those earning just below the higher rate threshold, and what increases there would be. There is a degree of uncertainty about that. Of course, over time we can see changes in the number of people paying higher rate tax, and that information is always publicly available. As far as the estimates are concerned, we make an assessment on a static basis, and that is what Governments have done in the past. May I make my second point regarding the Opposition’s position?

Owen Smith: Best if we could answer the first point first.

David Gauke: In the interventions this morning, the Opposition appeared to have forgotten two instances from the previous Government. The first is that in 2010, there was a freeze in the higher rate threshold. That could easily have been forgotten. I will also point out what happened for 2008-09. The majority of hon. Members on this Committee did not serve in the previous Parliament, but I am sure that everyone will be aware of the abolition of the 10p rate of income tax. I say “abolition”, but it was actually doubling the 10p rate of income tax. The then Chancellor of the Exchequer came back in the middle of the Finance Bill process to announce an increase in the personal allowance by £600 in an attempt to compensate those people for losing from the doubling of the 10p rate. That was in part financed by a reduction in the basic rate limit by £1,200, thus reducing the higher rate threshold. The idea that the higher rate threshold has always been sacrosanct, that it has been the determination of previous Governments to ensure that, whatever the circumstances, no steps are taken to bring more people into the higher rate band, is simply not accurate.

Owen Smith: It will be impossible for me to answer both points but perhaps I will address the first one in my closing remarks. On the latter point, not only did I not fail to mention the freeze in 2010, I mentioned it quite explicitly among a range of numbers. The two things are obviously linked, because the basic rate plus the personal allowance leads to the higher threshold. By extension—indirectly—I mentioned precisely that point. I shall address at length the other issue that the Minister raised when I make my own speech.

David Gauke: I very much look forward to that.

Grahame Morris: A little earlier, the Minister said that there were choices to be made and that there was a balance between the basic rate and the higher rate and the fact that where the threshold is set impacts on that. I go back to the basic point that the choice the Government made was to give £3.3 billion-worth of tax cuts to the top rate earners. That is where the choice was made, and that is where the rebalancing could be made. On the numbers, does he accept that the point is that over the lifetime of this Parliament, 5.8 million taxpayers will be in the higher rate group? That figure is substantial—it is double the number currently paying higher rate, which is significant.

David Gauke: The hon. Gentleman will be aware that in the Budget of a month ago, in the measures affecting top earners, five times as much will be earned from the tax increases announced, compared with the cost of reducing the 50p rate to 45p.

Owen Smith: Will the Minister give way?

David Gauke: Let me finish this point. It is clear that the measures in the Budget will increase taxation on the wealthy—we will get more money out of them. The additional revenues from the increase, along with other measures in the Budget, will contribute to raising the personal allowance by a record amount. I do not accept the argument at all.

Robert Syms: Is not the truth that the Government can make faster progress in getting to £10,000 if they limit the benefit to higher rate taxpayers, and that the reason for the measure is to increase incentives for the lower paid to get into work? If we introduce welfare reform and raise tax bands, those who are on benefit but are thinking of taking a job have slightly more incentive to do so than to stay on welfare. Getting people into work is critical.

David Gauke: My hon. Friend sets it out very well indeed. That is exactly the point. It becomes both more expensive and less focused on low-paid workers if we do not restrict the benefit of the changes in the personal allowance to basic rate taxpayers. I continue to find it surprising that the Opposition seem to oppose that approach.

Ian Swales: Does the Minister recognise that the measures under discussion are additional to others that have been taken by the Government, particularly the cut in the pension allowance from £250,000 to £50,000, which brought £4 billion into the Government, and the increase in capital gains tax from 18% to 28%? Such measures were not taken by the previous Government.

David Gauke: My hon. Friend is right. I could add to that list the measures that we took to tackle disguised remuneration, which were announced in last year’s Budget, which was also focused on high earners and was opposed by the Opposition.

Rachel Reeves: To go back to the point made by my hon. Friend the Member for Easington, how many people does the Minister believe will pay the higher rate of tax as a result of the changes by 2013-14? The director of the Institute for Fiscal Studies recently said:
“It would be useful to know if the Chancellor has a view as to what proportion of taxpayers should be paying at the higher rate.”
Will the Minister tell us his view?

David Gauke: We have set out changes in the higher rate threshold. We are not debating them in the Bill, but we will do so next year. As I said, those changes will result in approximately 300,000 additional people in the higher rate band for the reasons that I am setting out. It is not possible at this stage to give a full estimate of the numbers, because they will depend on what is likely to happen with wages and salaries over the next couple of years.
 Rachel Reeves  rose—

David Gauke: Let me finish the point. Because we are trying to focus the policy support—the benefit of the increase in the personal allowance—on basic rate taxpayers, we are not increasing the higher rate threshold at that level.

Owen Smith: We accept that.

David Gauke: The hon. Gentleman says he accepts that. To be fair, in his opening remarks he set out clearly the logic behind our policy, but it is not clear to me whether that is something the Opposition support.

Rachel Reeves: I asked two questions when I intervened, but I have not received an answer to either of them.
First, will the Minister give an estimate of the number of people who will pay the higher rate of tax by 2013-14? Secondly, the director of the Institute for Fiscal Studies said that it would be useful to know if the Chancellor has a view about what proportion of taxpayers should be paying the higher rate. Can the hon. Gentleman tell us? As for saying that he cannot estimate the number of people who will pay the higher rate, I do not believe it. He must have estimates, if he has estimates of how much will be received from different taxes.

David Gauke: Let me see whether I can address the hon. Lady’s first point. The number of people who we think will pay higher rate income tax as a whole in 2013-14 is estimated at about 4 million. The policy is what it is for the reason I have set out this morning. It is because we want to focus help on basic rate taxpayers. Again, I still do not know whether that is something that the Opposition support.
Is there a proportion that we are aiming for—do we want a particular proportion of the country to pay the higher rate threshold? No, it is not question of a target proportion, but a consequence of our desire to increase the personal allowance and to ensure that the increase in the personal allowance does not disproportionately benefit higher rate taxpayers, for the very reason that my hon. Friend the Member for Poole made clear: it is important as part of welfare reform and encouraging work incentives that we provide support at the bottom end of the pay scale.

John Mann: Will the Minister clarify matters for the record? He said that the Government’s policy was that there was no minimum percentage of taxpayers who as a policy imperative should be paying the higher rate. He said that there was no Government target for the percentage of taxpayers paying the higher rate.

David Gauke: What I said—the record will show it—is that there is no particular target one way or the other, minimum or maximum. The point is that we want to increase the personal allowance to £10,000. The measure under this Finance Bill will actually increase the personal allowance. It will not increase the higher rate threshold. It will hold it at a level amount, and provide a tax cut to higher rate taxpayers.

Owen Smith: Let me help the Minister out.

David Gauke: I do not have high expectation of such action, but I shall give way to the hon. Gentleman. If he wants to be helpful, he might like to tell the Committee whether he supports the approach that we have adopted about focusing the personal allowance on helping basic rate taxpayers.

Owen Smith: I said previously that I would happily address that matter in my closing remarks, with absolute clarity, I guarantee. In the same spirit of absolute clarity and to help the Minister out on whether we have a target or a minimum threshold for the number of higher rate taxpayers, I said earlier that 3% of taxpayers in 1979 were in the higher rate. [ Interruption. ] No, 3% in 1979. There will be 15% of taxpayers under the Government by the end of the spending period. Does the hon. Gentleman believe that 15% is too high or too low?

David Gauke: What are we trying to do with the tax system? We are trying to help low-paid workers. We are trying to help low-paid workers in a way that does not disproportionately benefit higher rate taxpayers. That seems a perfectly reasonable approach. I know that the Committee is anxious to hear whether the Opposition support that approach. We have now been debating this matter for a couple of hours and it is still not clear whether the Opposition think, having made a big fuss on this issue, that it is a good or bad idea that we focus help on basic rate taxpayers. The measure means that the vast majority of higher rate taxpayers would also benefit from a tax cut. I am pleased that we have been able to deliver that.

Stephen Barclay: I support the Minister in what he has said. Does he agree that growing the economy and attracting high-quality jobs that pay above the threshold is to be welcomed? We want that within our economy. Also, will he confirm that he will not set a target to deter that?

David Gauke: My hon. Friend makes a good point, and if the main objective of Government policy is to reduce the number of people paying higher rate tax, the most successful year in recent history is 2008, where we have learnt that it fell by a million. I do not know whether that is the approach that the hon. Member for Pontypridd wants to pursue.

Owen Smith: Just for the avoidance of doubt, although I did say it earlier—it was in fact the burden of the remarks that I made at some length—we do not object at all to how the Government are seeking to offset the impact of the £630 and ensuring that it applies right across the income distribution. We are pointing out that there are corresponding ancillary problems associated with that, which relate to the volume of people being dragged into the upper rate. That is the point that we were seeking to make and that is why we suggested that the Minister ought to review it. It was interesting to hear the Minister concede a moment ago that by the end of 2013-14 there would be 900,000 extra people, taking it up to 4 million, in that higher rate, thereby conceding—

Peter Bone: Order. Interventions are getting longer and the shadow Minister would be better keeping his remarks for his second go later.

David Gauke: Thank you, Mr Bone. I am grateful for that intervention, because we now have some clarity: the Opposition support the policy, but do not like the consequences of it.

Nigel Mills: It would be helpful to the Committee if we could understand what the consequences would have been of increasing the higher rate tax threshold by inflation. Is that a number the Minister can give us? Perhaps he can put it in the ever-filling Library at some point.

David Gauke: As far as the figures are concerned, I will see whether inspiration reaches me. The broad point— I suspect that this was the purpose of my hon. Friend’s intervention—is that it clearly would have been more expensive had we done that. Either we would have had to find resources from somewhere else, or we would have had to make less progress in moving towards the £10,000 threshold. That is an important point.
Amendment 8 would require the Government to publish a review of the impact that setting the basic rate limit has on the number of higher rate taxpayers. This amendment has been tabled, presumably, to suggest that the Government have not thought through the impacts. Budget 2011, however, announced equal and opposite changes to the personal allowance and the basic rate limit for 2012-13. As I have said, that keeps the higher rate threshold frozen, so that higher rate taxpayers benefit from the increase in the personal allowance by the same amount as basic rate taxpayers. That means that no higher rate taxpayers are created by this policy. As I have also said, the basic rate limit for 2013-14 will be set in order to give most higher rate taxpayers one quarter of the benefits of the personal allowance that the typical basic rate taxpayer will receive.

Owen Smith: Will the Minister give way on that point?

David Gauke: I will make a little more progress.
While some new higher rate taxpayers will be created by this, overall the majority of those brought into higher rate tax by Budget 2012 will still pay less income tax and national insurance in 2013-14, because of the increase in the personal allowance announced in that Budget.
I will give a simple example, which may help to illustrate the point. An individual with an earned income of £42,000 in 2012-13—perhaps one of the workers referred to by the hon. Member for Pontypridd—will pay tax at the basic rate and have a personal tax liability of £6,779. By comparison, an individual with an earned income of £42,000 in 2013-14 will pay income tax at the higher rate, but will have a liability of £6,669, which is £110 lower than the previous year.
The Government appreciate that many of those paying higher rate tax—in particular those individuals on the margins of it—are by no means wealthy. For that reason, reducing the basic rate limit and bringing more people into higher rate tax is not a policy objective. However, that is the unavoidable consequence of our desire to do as much as possible for those on even lower incomes.
As hon. Members will be aware, the intention of the personal allowance increases announced in the past three Budgets was to focus support on those with modest incomes and to remove as many of them as possible from income tax. Had we left the basic rate limit untouched, the personal allowance increases would be worth more to a higher rate taxpayer than to a basic rate taxpayer. Aside from being unfair, that would severely limit the support that we are able to give, within tight overall fiscal constraints, to those on lower incomes. That is why we have considered carefully, alongside each increase in the personal allowance, the level at which the basic rate limit should sit, and have taken the decision within the context of wider fiscal pressures.
Amendment 9 would require the Government to publish a review of the impact that setting the basic rate limit will have on average tax rates paid by total income. Opposition Members may have been trying to suggest that the decision will increase the average tax rates of individuals on the margins of the higher rate; in a number of speeches that we heard this morning they appeared to make that point.
As I have already clearly set out, the level of the basic rate limit for 2012-13 set out in clause 2 was specifically chosen so that no higher rate taxpayers would be created by the policy. Again, if hon. Members are concerned that average tax rates for those floating around the higher rate threshold will increase because of the basic rate limit announced in Budget 2012, I can assure them that, overall, the vast majority of those brought into higher rate tax by Budget 2012 will still pay less income tax and national insurance in 2013-14 due to the increase in the personal allowance announced in the Budget. Those individuals will therefore have a lower average tax rate than the previous year.
The amendments are unnecessary. As I have shown, the Government have fully considered the impacts of their decisions on the level of the basic rate limit. More crucially, the Government have already taken great steps to increase the transparency of tax policy-making. Indeed, we have gone much further than Opposition Members to understand fully the wide range of impacts associated with tax policy options, with the introduction of tax impact and information notes. The effects of the Government’s personal allowance packages are clearly set out in the relevant tax impact and information note published alongside the Bill and Budget 2012, and I believe that no further review is required. I therefore ask the hon. Member for Pontypridd to withdraw his amendments.
The changes made by the clause will help to support the Government’s objectives for a fairer tax system, so I move that the clause stands part of the Bill.

Owen Smith: I thank the Minister for his response, to which I will turn in a moment. First, I thank Members on both sides of the Committee for their contributions to our debate this morning on clause 2. I particularly like the suggestion of my hon. Friend the Member for Bassetlaw—that the Committee go on a road trip not only to discover the delights of baked products in his constituency but, more important, to witness at first hand the lived impact for real people of the words in the Bill and on the pages of the Chancellor’s Budget statement.
I thought that the real impacts were brought home to the Committee by the remarks made by my hon. Friends the Members for Easington, for Livingston and for Bolton West. They articulately drew a comparison between the benefits that people will enjoy in low and higher rate tax brackets as a result of personal allowances and the disbenefits that they will enjoy as a result of the other changes made by the Government.
It is in respect of those other changes that I would clarify for the Minister for the third or fourth time and for the avoidance of any doubt our attitude to the personal allowance change. We are not opposed to the personal allowance change. We are not opposed to taking more people out of tax. That is a good thing to do, but it is not the only thing that the Government could do to help low-income families in this country or to stimulate the economy. Other steps could be taken. My right hon. Friend the shadow Chancellor spelled this out on several occasions.
The Government could have chosen to cut VAT once more. That would have benefited low-earning and middle-earning families to the tune of £400 or £500 a year. They could have chosen to do something more straightforward with income tax which might have been a sharper stimulus. There are lots of things the Government could have chosen to do. The other point that we have made repeatedly today is that it is not a cost-free, entirely neutral exercise, as the Government have sought to portray it. I will come on to illustrate what I mean by that.

David Gauke: The hon. Gentleman has said a number of times that the Opposition are not opposed to the increase in the personal allowance. He has used the phrase “not opposed” repeatedly rather than saying that they support the increase in the personal allowance. I do not want to be pedantic, but I suspect that the hon. Gentleman is choosing his words very carefully indeed. Does he support the increase in the personal allowance?

Owen Smith: I was under the misapprehension that it was the Opposition who asked questions and the Government who answered them. I know that the Minister seeks to play with tradition here. Again, let me be very clear to the Committee: if we were straightforwardly opposing the measure, we would have tabled an amendment to do just that. We have not done that because we understand that the measure will benefit some low-earning people in this country. It will not benefit all of them and in the next clause we will discuss at some length the offsetting impacts and the way that this is not felt right across the income distribution.

Grahame Morris: Will my hon. Friend confirm that the litmus test of the success of the Budget is whether it delivers jobs and growth?

Owen Smith: I absolutely accept that that is the litmus test of the Budget. It was meant to be a Budget for growth and for business. What has the OBR decided? Its view is that it will deliver 0.1% gross domestic product growth over the year, which is not something that most people would consider to be a real measure of success.

David Gauke: I am listening very carefully to the hon. Gentleman. He said that the Opposition are not straightforwardly opposing this and that if they were they would have tabled an amendment. Is he therefore saying that he is opposing this, but not in a straightforward way?

Owen Smith: I do not know whether that was supposed to be a bit of clever-dickery in the use of words there, but it did not work terribly well. I have been very clear. We think that this is one measure that the Government could employ. There are many other measures that would have been more equal in their impact right across the distribution range. There are many other things that the Government could have done for low-earning families, in particular reducing VAT which would have been felt right across the board, irrespective of income groups.

Rachel Reeves: Will my hon. Friend confirm that a reduction in VAT back down to 17.5% would have benefited pensioners, who will not benefit at all from this increase in the personal allowance, and would also benefit those people who do not pay tax at all because they do not earn enough?

Owen Smith: Of course, that is absolutely right. It is self-evident. One merely needs to look at the income distribution to see that the lowest two deciles barely benefit at all from the changes to personal allowances. It is very much in the middle and upper deciles of the income distribution that the benefit is felt. Pensioners and low earners, of course, are in that lower decile, and they are the people who would have benefited most from other changes, such as VAT changes and many other means of changing the income distribution.

Richard Harrington: Just as the hon. Gentleman confirmed the previous question, will he confirm that his proposed reduction of VAT would be of great benefit to Ferrari purchasers?

Owen Smith: That is true, of course. The change would, however, most benefit those people on low incomes. [ Interruption. ] Well, the whole point of VAT is that it is a regressive tax. Although in cash terms VAT may be seen to have a big impact at the top end of the income scale, in real terms the proportion of income taken in VAT is disproportionately higher for people on low incomes. [ Interruption. ] Someone says from a sedentary position that that is not true, but it is absolutely true, and I will prove it if they want.

Ian Mearns: If a Ferrari purchaser were to benefit from an additional £4,000, that would be added to the additional £42,000 they receive from other measures in the Budget.

Owen Smith: I have no doubt that first among the people who cheered loudest at the Budget and the Finance Bill were the headline writers, who have had a field day over the past couple of weeks, but second were probably the Ferrari drivers, who on average, if they are millionaires, are getting a tax bung of £40,000 each over every year of this Tory Government.

Richard Harrington: Of course, the Ferrari purchaser could be someone who benefited from the far lower rate of capital gains tax under the previous Government. On the disposal of his millionaire’s business, although such a person would have no income, the money could be used to purchase a Ferrari with a 2% reduction in VAT.

Owen Smith: I often enjoy the hon. Gentleman’s interventions, which are invariably good humoured and enjoyable. If he wants to continue speaking for Ferrari owners the length and breadth of the country throughout our consideration of the Bill, I look forward to it.
I now turn to the inherent contradiction in the remarks of the Exchequer Secretary on fiscal drag. My remarks were principally about the fact that, in opposition, the Government used to be terribly concerned about the impact of fiscal drag and the number of people being pulled into higher income tax brackets, but they no longer seem to be concerned about that at all. From his remarks, he certainly does not seem to be prepared to concede that the Government ought to measure the impact of fiscal drag, as called for by amendment 8.

John Mann: Is my hon. Friend not shocked that in their contributions Conservative Back Benchers enthusiastically welcomed the notion that more people would be dragged into the higher rates of taxation—a reversal of Conservative ideology over the past 100 years?

Owen Smith: I was surprised by that. I am sure that Government Members enjoyed the gentle teasing of my hon. Friend the Member for Bassetlaw when he suggested that, when we press this sensible and perfectly innocent amendment to a vote later, we will test the backbone of Government Back Benchers.
The amendment is not terribly strenuous or taxing—pardon the pun. It merely asks the Government to measure the impact of fiscal drag. I thought that Government Back Benchers were noticeably quiet and reticent about commenting on the fact that on their watch, a Tory tax-cutting watch, we will see almost 3 million additional people hoovered into the top rate of tax as a result not only of fiscal drag but of the policies undertaken by the Government.

Jacob Rees-Mogg: Will the hon. Gentleman give way?

Owen Smith: I will delightedly give way. For the record, when I referred to the hon. Gentleman addressing me de haut en bas, I meant it figuratively in respect of height, as opposed to anything else.

Jacob Rees-Mogg: I am extremely grateful for that clarification.
Many Conservative Back Benchers have the finest backbones, reinvigorated by Margaret Thatcher.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at half-past Four o’clock.